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TORONTO (Reuters) - The Canadian dollar closed at its lowest level in nearly a month against the U.S. dollar on Tuesday, as domestic data supported expectations of a Bank of Canada rate cut and offset any benefit from higher oil prices.
Domestic bond prices took their cue from the bigger U.S. market and finished lower across the curve ahead of a domestic retail sales report due later this week.
The Canadian dollar closed at C$1.0171 to the U.S. dollar, or 98.32 U.S. cents, down from C$1.0075 to the U.S. dollar, or 99.26 U.S. cents, at Friday's close.
Data that showed Canada's wholesale trade fell more than expected in December weighed on the currency, which later went on to hit a session low of C$1.0174.
The data followed another domestic report that showed core inflation, which helps guide Bank of Canada interest rate decisions, slowed to 1.4 percent in January, in line with forecasts.
"The market is starting to react to concerns that maybe the activity data in Canada is weaker than currently anticipated, which further emphasizes the importance of the retail numbers on Friday," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"But, having said that, I am a little bit surprised about the extent of the selloff in the Canadian dollar."
The data has all but cemented a rate cut in March, especially since there is not enough economic data left to sway the central bank's decision before March 4. But the size of the cut is still up for debate.
A Reuters poll taken on Tuesday showed eight of Canada's 12 dealers forecast the central bank will cut its key rate by 50 basis points to 3.50 percent. Four of the dealers expect a 25 point cut.
Strauss also suggested the domestic currency encountered further selling pressure around the C$1.0120 level, which he said attracted a slew of U.S. dollar buyers.
That pressure outweighed any benefit the commodity-linked Canadian dollar drew from soaring oil prices, which hit a record high of $100.10 a barrel on Tuesday. The currency often takes its cue from oil prices, given Canada's position as a key energy producer and exporter.
Canadian bond prices followed U.S. treasuries lower despite the negative domestic data on wholesale trade.
"All things considered, the movements we saw in Canada largely reflected a lot of the same movements you saw out of treasuries in the U.S.," said Max Clarke, an economist at IDEAglobal in New York.
"The markets really didn't have too much to say about the CPI data, given the fact that it was largely accommodative to further rate cuts from the Bank of Canada."
Clarke also suggested the market is looking ahead to the Canadian December retail sales data, due Friday, as it will offer some insight as to how resilient consumer demand is going to be in 2008.
The two-year bond fell 22 Canadian cents to C$101.94 to yield 3.112 percent. The 10-year bond slid 90 Canadian cents to C$100.55 to yield 3.928 percent.
The yield spread between the two- and 10-year bond was 81.6 basis points, down from 82.4 points at the previous close.
The 30-year bond lost C$1.45 Canadian cents to C$112.05 to yield 4.274 percent. In the United States, the 30-year treasury yielded 4.670 percent.
The three-month when-issued T-bill yielded 3.25 percent, unchanged from the previous close.
Editing by Rob Wilson